COMMISSIONER OF INCOME-TAX vs. TRIMURTI FABRICS

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ITR/138/1993HC GujaratGJHC24021217199316 October 2001Author: HONOURABLE MR. JUSTICE MOHIT S. SHAH,HONOURABLE MR. JUSTICE D.A.MEHTA3 pages
AI SummaryRemanded

What did the High Court hold?

The High Court answered the referred question in the negative, in favour of the revenue and against the assessee. The Court noted that the question was concluded by its own decision in CIT vs. Yoganand Textiles (202 ITR 869), which held that majoori payments made by a partnership firm to its partners are hit by Section 40(b). However, the Court also referred to an alternative contention considered in Yoganand Textiles, which stated that it would be necessary for the Tribunal to ascertain the real nature of the payment. All expenditure incurred by the partners for carrying out activities on behalf of the firm should be deducted before disallowing the net remuneration paid to the partners under Section 40(b). Consequently, the High Court directed the Tribunal to ascertain what portion of the Rs. 1,55,998/- represents a real payment that could be termed remuneration after accounting for genuine deductible expenditure incurred for the firm's work.

What were the facts?

The Income Tax Appellate Tribunal (ITAT) referred a question to the High Court of Gujarat at Ahmedabad at the instance of the revenue. The assessee is Trimurti Fabrics. The dispute concerns the disallowance of payments of Rs. 1,55,998/- made by the partnership firm to its partners. The revenue sought to disallow these payments under Section 40(b) of the Income Tax Act, 1961. The ITAT had previously held that these payments could not be disallowed. The High Court heard arguments from both the revenue and the assessee.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has been right in law in holding that the majoori payments of Rs. 1,55,998/- paid by the assessee to its partners could not be disallowed under the provisions of section 40(b) of the Income-tax Act, 1961? Assessee's contention: The judgment does not record any specific contentions made by the assessee. However, the ITAT's prior decision implies the assessee argued that the payments were not disallowable under Section 40(b). Revenue's contention: The revenue contended that the majoori payments made by the partnership firm to its partners are hit by Section 40(b) of the Income Tax Act, 1961. They relied on the High Court's decision in CIT vs. Yoganand Textiles, 202 ITR 869.

Which sections of the Income-tax Act were involved?

Section 40(b)

AI-generated summary — verify with the full judgment below

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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No 138 of 1993

For Approval and Signature:

Hon'ble MR.JUSTICE M.S.SHAH and Hon'ble MR.JUSTICE D.A.MEHTA ============================================================ 1. Whether Reporters of Local Papers may be allowed : NO to see the judgements?

2.

To be referred to the Reporter or not? : NO 3. Whether Their Lordships wish to see the fair copy : NO of the judgement?

4.

Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

5.

Whether it is to be circulated to the Civil Judge? : NO -------------------------------------------------------------- COMMISSIONER OF INCOME-TAX Versus TRIMURTI FABRICS -------------------------------------------------------------- Appearance: MR MIHIR H.JOSHI FOR MR MANISH R BHATT for Applicant. MR RK PATEL for Respondent No. 1 --------------------------------------------------------------

CORAM : MR.JUSTICE M.S.SHAH and MR.JUSTICE D.A.MEHTA

Date of decision: 16/10/2001

ORAL JUDGEMENT (Per : MR.JUSTICE D.A.MEHTA)

1 The Income Tax Appellate Tribunal, has referred the following question at the instance of the revenue :

"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has been right in law in holding that the majoori payments of Rs.1,55,998/- paid by the assessee to it partners could not be disallowed under the provisions of section 40(b) of the Income-tax Act,1961 ?"

2 We have heard Mr.M.H.Joshi for the revenue and Mr.R.K.Patel for the respondent-assessee.

3 It is common ground between the parties that the made by the firm to it's partner. In other words, all the expenditure incurred by the partners for carrying out activities which they were carrying out on behalf of the firm shall have to be deducted before disallowing the net remuneration paid to the partners in the hands of the firm u/s. 40(b) of the Act.

4 Following the aforesaid decision, we answer the question referred to us in the negative i.e. in favour of the revenue and against the assessee. However, the Tribunal shall go into the question of ascertaining what portion of the amount of Rs.1,55,998/- is real payment which could be termed as remuneration in the hands of the partners after taking into account all genuine deductible expenditure incurred for the work of the firm from these amounts as having been incurred by the firm itself to its partners.

5 The reference stands disposed of accordingly with no order as to costs. (M.S.Shah,J) (D.A.Mehta, J)

m.m.bhatt

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